Option Incentives Become Weaker Instrument Of Equity Based Compensation

control over the company. Also, as we discussed in the cash option, share price will

Compensation systems can take on many forms, all of which have positives and negatives related to it. However, certain components are noted to be determinants of solid compensation plans. One agreement of a solid compensation system is the use of incentives. “Clearly a successful companies set objectives that will provide incentives to increase profitability” (Needles & Powers, 2011). Incentive bonuses should be measures that the company finds important to long-term growth. According to Needles & Powers (2011) the most successful companies long term focused on profitability measures. For large for-profit firms, compensation programs should offer stock options. The interweaving between the market value of a company’s stock and company’s performance both motivate and increase compensation to employees As the market value of the stock goes up, the difference between the option price and the market price grows, which increases the amount of compensation” (Needles & Powers, 2011). Conclusively, a compensation plan should serve all stakeholders, be simple, group employees properly, reflect company culture and values, and be flexible (Davis & Hardy, 1999; The Basics of a Compensation Program).

7. Option compensation will continue to be a critical component of compensation for executives as it simplistically aligns the executives’ pay to shareholder value in its simplest sense. I don’t believe that options compensation is the primary driver of behavior when things shift from the legal to the illegal. As with most senior executives in industry, ego is a huge driver in individual behavior. Compensation is important, but the recognition of your performance is sometimes even more important. We have created a performance driven culture without the necessary control framework for people to operate within. One minute you are doing a great job, the next you have crossed an imaginary line. The frameworks don’t do enough to quantify behavior as legal and illegal leaving inconsistent rules for organizations to operate within. How does Enron compare to the subprime mortgage debacle, or to Steve Jobs backdating options. There remains too much room for interpretation.

2.Shareholders want high long-term profits. Managers want job security and wonderful perks and amenities. Since risk and return tend to be positively related, managers may wish to avoid risks that shareholders want the managers to undertake. To encourage managers to take on risks, compensation committees can place a greater weight of their compensation on long-term incentives such as stock, options to buy stock, and bonus based on surpassing the performance of comparable firms over several years. When all

Stock options are another main concern and are based upon the performance of a company. A lot of companies are in a low return and low compensation which then caused bad business and it’s about 400 times that amount. I believe the government is trying to tighten down on excessive executive compensation with implementing salary caps. Executives are unrealistic with common life and way of living therefore; they do not take any consideration with the underdogs of the company or the world. The economy does have hope but it’s a long way from being stabilized once again.

I light of the strong shareholder rejection, I think the board of directors should reconfigure the terms of the remaining four-year $15 million package. Specifically, I think they should reconfigure the terms tying it to performance in a way that incentivizes the CEO, benefits the corporation and the shareholders, as well as safe holds against the agency

Murray Compensation, Inc. (Murray), an SEC registrant that provides payroll processing and benefit administration services to other companies, granted 100,000 “at-the-money” employee share options on January 1, 2006. The awards have a grant-date fair value of $6, vest at the end of the third year of service (cliff-vesting), and have an exercise price of $21.

The second compensation package was not well designed nor did it help define what the corporate strategy would be. For a second time the compensation package focused on maximizing shareholder’s wealth and didn’t take into consideration the stakeholder’s position at all. Dunlap’s package was deeply weighted in company options ($3.75M). In fact it was weighted heavier than before. The stock grants were

I think the stock option compensation plan is not a bad idea when it comes to paying a corporation's board of director members. The board of director members pay option plays a vital role in the success of an organization. I think that theses board members need to be paid based on the company's financial profitability and the economic growth they help provide to the business. If the board members are paid a set wage there is no need for them to strive to excel the standard because their pay is already set in stone. If businesses compensate their board members according to the increased stock sales in the firm the board members must perform well to receive the pay they deserve. Board members have normally been compensated a yearly salary

It was reasonable for a CEO’s compensation to increase as the company expanded and became a larger entity, and the newly-granted shares and increasing stock options further aligned the CEO’s personal interests with those of the company and shareholders. In this sense, the second compensation package was also well-structured and not excessive. Seeing Sunbeam’s revenue rising and stock price climbing steeply upwards, Sunbeam’s shareholders and directors were fully convinced by Dunlap’s leadership, so they might perceive the increase in compensation amount necessary to retain and better motivate Dunlap to enhance the company’s value. Nonetheless, they neglected the fact that the increased portion of the equity-based compensation also further motivated the CEO’s dangerous behaviors pertaining to improper earnings management.

Murray Compensation, Inc. (Murray), an SEC registrant that provides payroll processing and benefit administration services to other companies, granted 100,000 “at-the-money” employee share options on January 1, 2006. The awards have a grant-date fair value of $6, vest at the end of the third year of service (cliff-vesting), and have an exercise price of $21.

I agree that for the companies or executive the advantages surpass the disadvantage on stock option compensation package grant tied to company performance, however for average or lower level employees who are in the mercy of the key executive’s business decisions. Employee stock option provide advantages to companies such as ability to attract highly motivated and entrepreneurial executives and the capacity to hire and fulfill incentive without draining earnings or company’s equity or spending cash. Obviously, employee stock option benefit companies at it provides tax benefit and no accounting cost, while encourages executives to act in shareholder’s interest and risk taking or aggressive business decision for substantial return and favorable stock price. However, the risk cause by executives manipulating stock price and making wrongful investment decision can’t be ignored as well, as executives could manipulate stock price through fraudulent earnings to deceive investors and the market, then when stock price is at peak, executives exercise their stocks option leaving the company stocks underwater, which I do think what happen with Cendant Corp.

Besides that, CSI also offer the stock options to all the employees in the first year they joined the company but the value of stock option component varied depending on tenure and position in the company. Employees will be given four years from the offered date to buy or not to buy the stock and it is limit to 25% per year. It will be expired 10 years after granting or within 30 days of leaving the company. However, CSI has not yet implement the formal plan for annual stock option grants. Hence, the grants would be awarded based on an ad hoc basis to ensure that employees’ stock holdings were in line with their current position and contribution to the company. Stock option actually is an effective motivational tool but not for CSI, this is because their employees do not understand the options and does not know how to value them. Moreover, the options were become worthless since the company is not a public company. In another word, CSI were lack of formalization to control stock options and does not give very clear direction to employees about the targeted areas and results through compensation system (stock option). Apart from that, stock option

These tactics are built by management for self-protection reasons, being severe, (blocking takeovers) or soft tactics with no substantial impact on the offer price. However, empirical evidence shows that although manager’s defensive tactics may sometime rarely shareholders by increasing wealth, in general, these tactics do not have a positive impact in the share price of the target firm. According to DeAnglelo and Rice (1983) cited in Ruback (1987.p56-57), they found no evidence of share price reaction to adoption of corporate charters amendment when analyzing 53 firms using staggered boards as well as the effect of super majority provision.

Stock options are granted to employees as a form of compensation or incentives. Both public and private companies follow this practice. The options give the executives the right but not the obligation to buy the company’s shares at a fixed price before the expiration date is reached. If the company does well, its shares prices rise. But the employee can buy the shares at a lower price fixed at the beginning. This will give the employee instant profit. Knowing that he/she will make a profit when the company’s share prices go up, the employee is motivated to work hard for the company to grow. This is why employee stock options is such a popular method of compensation among many companies. However according to Hall, critics state that the stock options only motivate the employee to work harder for the immediate boost of the company’s sales so as to increase their own profits and that the employee has no real interest in the actual long term benefit of the company. It ends up in a win-win situation between the company and its employees. He cannot sell the options, he cannot pledge them as a collateral for a loan. Stock options is a contract that the employee / executive has with the company whereby he/she has the right to buy a specific amount of stock within a specific period of time. Generally the maximum period is 10 years. The employee has to be in good standing with the company and has to perform well. The options are vested in him and he has the right to